The Centre is set to kick off its disinvestment programme on Friday by selling 5 per cent of its stake in Steel Authority of India Ltd (SAIL). Based on SAIL’s closing price on Wednesday, the sale should fetch around ₹1,768 crore.

After SAIL tests the market, other state-owned companies whose shares will be put on the block are ONGC, Coal India, and Hindustan Zinc (residual stake sale)..

This is the first time the offer for sale, or the auction, method is being used in the disinvestment process. This is different from more popular methods such as the Follow-on Public Offer (FPO). FPOs are considered to be time consuming and costly.

In the auction method, fewer documents are required and the entire process can be completed in less than a week. In a bid to woo retail investors, the government is offering them a 5 per cent discount, and also reserving for them 10 per cent of the total number of shares to be offered for sale.

A retail investor has been classified as an individual who places bids with a total value of ₹2 lakh or less.

According to a notice sent to stock exchanges on Wednesday, over 20.65 crore shares of SAIL will be sold.

On Wednesday, the SAIL scrip lost around 4.7 per cent over its previous closing price to end at ₹85.65.

Pricing and allotment

The floor price for the auction will be announced by 5 pm on Thursday. This is the price at or over which any investor can bid.

Based on the bids, two cut-off prices will be determined, one for retail and one for institutional investors. Bids below the cut-off prices will not get any allotment.

If there are more genuine bids than the shares on offer, then allotment will be made on a proportionate basis.

How to apply

Retail investors are not required to fill forms or apply electronically themselves for the shares. According to Prithvi Haldea of Prime Database, “If an investor has an online facility from his broker, he can apply there. Those who don’t have this facility will need to approach a broker, who will place bids in a special window of the stock exchanges.”

Retail investors will also be required to pay the full bid amount up front.

Simply put, if an investor uses an online facility provided by a broker or approaches a broker to bid on his behalf, he will have to first deposit the entire bid amount with the broker. The broker, in turn, will deposit the amount at the time of bid.

Final price

The final allocation price for retail investors, after discount, may be below the floor price. However, institutional investors will get shares at or above the floor price.

Haldea said that the reworked mechanism is a better one than the earlier mechanism.

But he believes a better way to bring retail investors back into the stock market through the disinvestment programme is to have a fixed price offer at a discount to the current price, he said. The discount offered to them should be at least 10 per cent, Haldea added.